Biggest economic decline since waning years of Marcos regime seen

MANILA, Philippines — The Philippine economy’s contraction this year could be greater than earlier predicted as measures to contain the coronavirus outbreak weigh on domestic demand and investments, and the budget deficit is expected to rise sharply in 2020.

Gross domestic product (GDP) was expected to decline 2 percent to 3.4 percent this year, the first contraction in 22 years since the Asian financial crisis and the biggest decline since the waning years of the dictatorship of Ferdinand Marcos, and worse than the government’s forecast of -1.0 percent to zero growth in March.

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The further downgrade was decided on Tuesday during a meeting of the Cabinet-level Development Budget Coordination Committee (DBCC) chaired by Budget Secretary Wendel Avisado. The DBCC is an interagency body in charge of setting the government’s macroeconomic goals and policies.

While full-year 2020 GDP may slide at a faster pace, acting Socioeconomic Planning Secretary Karl Kendrick Chua told the Inquirer on Wednesday that he was hopeful of a quick, “V-shaped” recovery before the end of the year.

“Probably more negative in the second quarter before positive growth in the second half,” said Chua, who heads the state planning agency National Economic and Development Authority (Neda).

In March, at the onset of the enhanced community quarantine (ECQ) imposed on Luzon and other parts of the country to halt the spread of the coronavirus, the DBCC projected GDP to post zero growth or contract by 0.8 percent to 1 percent.

But the GDP already shrank by 0.2 percent year-on-year during the first quarter— ending 84 quarters of growth since 1999 — no thanks to Taal Volcano’s eruption and the coronavirus pandemic, which not only slowed global trade and tourism but also forced lockdowns.

Possible recession

The first-quarter print made the possibility of a recession or two consecutive quarters of economic contraction earlier than expected, as the ECQ that started mid-March had already been extended four times in areas with high COVID-19 cases, the latest until May 31.

At the most optimistic end of the latest DBCC projection, 2020 will be the first time since 1998’s 3-percent annual decline that the Philippines will experience a recession.

This year’s budget deficit is estimated to reach P1.56 trillion ($31.04 billion) or 8.1 percent of GDP, a far bigger shortfall than the government’s forecast of 5.3 percent in March, and more than double its original estimate of 3.2 percent.

“These revised assumptions will also allow the government to operate with a more realistic and prudent fiscal stance as it flags the downside risks to the economy and the fiscal program for the rest of the year,” the DBCC said in a statement on Wednesday.

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The Philippines, which was one of Asia’s fastest-growing economies before the pandemic, is on the edge of a recession after growth unexpectedly shrank 0.2 percent in the first quarter, dashing forecasts for a 3.1 percent growth.

Extended lockdown

Economists believe GDP will see a steeper drop ahead as an extended lockdown in the capital takes a heavier toll on domestic demand, building the case for more monetary policy easing in the coming months.

On Tuesday, President Duterte announced that Metro Manila, Laguna province and Cebu City would remain under lockdown up to the end of May, extending one of the world’s strictest and longest community quarantines to try to contain the outbreak.

The government is implementing a P1.4-trillion relief program to mitigate the economic impact of the coronavirus outbreak, which has infected more than 11,000 people in the country and killed more than 700.

According to the DBCC, Neda has estimated output losses due to the pandemic hitting P2 trillion this year, equivalent to 9.4 percent of the economy worth P19.5 trillion as of last year.

Recovery program“Timely implementation of a well-targeted recovery program, alongside efforts of the private sector, will mitigate the impact of the COVID-19 pandemic. Such a program will help the country regain confidence, attain higher economic growth, and restore employment rates to precrisis levels,” the DBCC said.

Once the recovery program being prepared with Congress is put in place, the government’s economic team sees GDP rebounding by 7.1-8.1 percent in 2021.

Foreign trade, however, will likely struggle this year, partly as the bigger global economy also took a bad hit. Exports of Philippine-made goods were projected to drop by 4 percent, while imports—including raw materials and capital equipment needed for big-ticket infrastructure projects—would decline by a faster 5.5 percent in 2020, DBCC projections showed.

In March, the DBCC was expecting meager growth in external trade but downscaled its updated outlook “in anticipation of the global economy’s sharp contraction as a result of the COVID-19 pandemic.”

The pandemic has also put pressure on the government’s fiscal program as it will have to spend more, especially on COVID-19 response, despite weaker tax and nontax revenues as a result of an economic recession.

Expenditures on public goods and services were now estimated at P4.18 trillion for the entire year, higher by P12 billion from the programmed P4.16 trillion in March.

“The emerging disbursement program takes into account the releases for COVID-19 initiatives charged to savings coming from austerity measures, among others,” the DBCC said.

Spending vs revenue

At 21.7 percent of GDP, government spending as a share of the economy was poised to be a record-high in 2020.

The 2020 revenue target, however, was slashed by 17.7 percent to P2.61 trillion from the March projection of P3.17 trillion as tax collections were expected to be weak amid a bad economy.

The bigger expenditures and weaker revenues will inflate the budget deficit to P1.56 trillion or 8.1 percent of GDP, wider than the programmed 5.3 percent of GDP or P990.1 billion last March.

“Despite increased deficit spending, the national government’s deficit-to-GDP ratio will remain in the median of comparable countries in Asean and in East Asia, among peers with similar credit ratings, and among other emerging market economies, as long as the ratio does not exceed 9 percent,” the DBCC said.

But at the worst case of 3.4-percent economic contraction in 2020, the Philippines’ GDP would fall at its fastest pace since 1985’s 6.9 percent.

The share of debt to GDP, meanwhile, will climb to about 50 percent this year from 39.6 percent last year, higher than the previous projection of 44.9 percent.

Under the Duterte administration’s socioeconomic strategy against COVID-19, the government planned to borrow an additional P310 billion from foreign multilateral and bilateral lenders to augment funds.

Under the 2020 national budget and before the pandemic, borrowings were supposed to hit a record P1.4 trillion, with 75 percent to be sourced locally mainly through the sale of treasury bills and bonds.

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